Companies in the tech sector to ‘continue to be the best in class’: Strategist

Jeff Schulze, Investment Strategist at ClearBridge Investments, joins Yahoo Finance to discuss investment opportunities in the tech sector, supply chain bottlenecks, and market movement in the coming months.

Video Transcript

ADAM SHAPIRO: I got to talk about what's happening with these markets. And a lot of people have been sitting on the sidelines with cash, waiting for the opportunity to jump in. But be careful if that is your strategy. Jeff Shulze, ClearBridge Investments investment strategist, joins us now to discuss this.

And you pointed out in a recent note that it's market timing, and it's always risky to do that. But everyone keeps waiting for the fall to drop back in. And you're warning clients, be careful if that's your strategy. Why?

JEFF SCHULZE: Well, thanks again for having me on the program. And one of the reasons why we felt that this correction wouldn't get much greater than it did is you've seen a huge influx of retail participation in equity markets this year. Global equity flows have been about $750 billion year to date, which is about four times the amount of inflows that you've seen over the previous 2 and 1/2 decades.

So you've seen a strong retail participation, a retail put, if you will. And retail investors haven't had an opportunity to buy the dip in quite a long time. And I felt that they would take advantage of it. And certainly, they did in the lows in the early part of October. And the markets haven't really looked back since.

SEANA SMITH: Jeff, how are you looking at the selloff that we're seeing in some of those big tech names today? Apple and Amazon both missing the Street's expectations last night after the bell. Are you seeing any investment opportunity, not only within those two specific names, but more broadly speaking within that sector?

JEFF SCHULZE: Yeah, I think these are great companies. Obviously, they generate a lot of free cash flow. They have very strong revenue growth. You saw Amazon, a lot of their miss was because of higher costs of trying to retain employees. But looking out, I think these are going to be companies that continue to be the best in class. And quite frankly, if the 10-year Treasury doesn't rise a lot more from here and we stay in this 1 and 1/2 percent, call it 1.6% or 1.7% range, these are very attractive companies that, I think, are going to look past this near-term weakness and start to outperform on a relative basis as we move towards 2022. So I think this is a temporary setback.

ADAM SHAPIRO: When we were moving into October, analysts would tell us that, look, if you recover the losses in September and October, you can expect to finish even higher at the end of the year. What do you say to people who are saying, OK, October was pretty strong?

JEFF SCHULZE: Yes, October is usually a bit of a volatile month. But if you look to the last two months of the year, this is really when seasonality tends to kick in. And November is the best month for performance. If you look back to 1950, December is the third best month. And quite, frankly when you've had a strong start to the year with the first 10 months of the year having the best performance in the top quintile, we're up about 21% here year to date, so we are in that top quintile.

The average return that you see in November and December combined is 5%. And you have a hit rate of being positive about 92% of the time. So usually, strength begets more strength. And even though we've seen a strong October, I think we're going to continue to see that momentum move forward, especially with the strength that we've seen here with third quarter earnings.

SEANA SMITH: Jeff, what about the supply chain issues? Because right now, it's clear that a lot of these companies do have pricing power. But looking out beyond this current quarter and into 2022, I guess, how long can these companies raise prices?

JEFF SCHULZE: Obviously, that's a key reason why you've had such a strong third quarter earnings season. A lot of companies have been able to successfully pass through these costs to the end consumer. But I believe that a lot of these supply chain bottlenecks are going to start to alleviate themselves as we move into next year.

Now, a vast majority of the bottlenecks are for one of three reasons, either COVID-related reasons, the lack of being able to find workers, or shipping issues. And although shipping issues are going to certainly persist into the middle part of next year, you're going to see a lot of easing at the ports as we move through the holiday season and we get past the Chinese New Year, which is traditionally a slower period of time for inbound goods.

From a labor market perspective, I still believe that we're going to see very strong uptake of labor supply, as 8 and 1/2 million people have lost those federal unemployment benefits in September. Likely going to start to transition back into the labor market. But also, as we move past peak Delta here, and we get to a more normalized environment-- and I think we've seen the last disruptive wave of Delta in the US.

I think a lot of people that are out of the workforce because they're scared of getting COVID or those parents that are home because of their irregular school schedules will start to transition into the labor markets in 2022. So I think, because of these two drivers, I think labor supply and demand are going to be much more closer into equilibrium. And I think that goes a long way to clearing up these supply chain issues.

And last thing I'll mention is, if we don't have another disruptive outbreak of COVID, again, a lot of these supply chain issues are aren't going to be as prevalent as what we've seen here recently.

ADAM SHAPIRO: You ended the note with a great quote from Richard Russell. Quote, "a bull market is a bull. It constantly tries to throw off its riders." The reason I bring that up is we've talked about market issues. There is something that might throw off these riders. And that's we've got to go through the debt ceiling fight all over again.

And while everybody says they always raise it, this is a different kind of political environment than any of us in the past four or five decades can remember. Are you worried that when we get to that fight, that it could be all hands off and off the bull we go?

JEFF SCHULZE: I'm not worried. Obviously, you've seen government shutdowns over the last couple of decades. I think you've seen about seven of them since 1990. The reason why you see a government shutdown is that the consequences aren't dire. You have a brief disruption of the economy. But when the government refunds itself, the economy goes back to trend levels.

But the debt ceiling is an entirely different animal. When you fail to make the debt ceiling higher, you're messing with the full faith and credit of the US government, right? And obviously the dollar attracts capital when things get rough. It's a risk-off type of investment. Treasuries attract capital when you have a risk-off environment.

And if you breach the debt ceiling a couple of times, you may lose the world's reserve currency role that the dollar currently holds. And also I think, maybe more importantly, as we move towards the midterm elections, if you have an instant shutdown and the government has to have a balanced budget, that is going to cause huge disruptions in the economy and likely will cause a recession, which is exactly what you don't want to have as you move into the year of the midterm elections.

So I think it's going to be a lot of brinkmanship. But I think eventually, you will see the debt ceiling raised because the consequences are dire. And politicians know that.

ADAM SHAPIRO: We look forward to having you come back. And we hope the politicians are listening to you. All the best to you. It's always good to have you here, Jeff Schulze, investment strategist. All the best to you over the weekend.